Okay, this first part is fairly obvious, but needs to be stated. I promise we will get a little more subtle and nuanced as we explore the topic of whether you should always buy your principal residence, or if renting might be better for you.
When we asked last month if this topic would be of interest, a record number of readers responded yes. I’m the first to say I don’t have all the answers, and so would welcome your input, ideas and experiences.
Here’s the first part - if you purchased a house 10 or 20 years ago, whether in Winnipeg or one of the really hot markets of Toronto and Vancouver, and you paid your mortgage down, had no huge surprises on repairs, expenses or property tax increases, you have received a huge benefit for having been a homeowner.
You built equity by paying down the mortgage, and that was guaranteed unless the price of the house actually fell. And thanks to the rapidly increasing prices of houses over the last two decades, you likely built up the largest capital gain you will experience in your lifetime, and when you sell the house that gain will be tax-free under the Principal Residence Exemption.
Ya done good. So, that summarizes the potential financial benefits of home ownership.
But, believe it or not, oh ye of the short memory, it has not always worked out this way. And recent history might not repeat itself in the near future. Let me give you my example.
In 1986, we sold our starter home for a healthy profit (thanks both to our complete rebuilding and the gentrification of our core area neighbourhood), and moved up into a house large enough for the expected second child. We put in a low offer to a motivated buyer with no conditions attached, and believed we got a very good deal.
However, after spending over $60,000 and lots of sweat equity on improving the house in many ways over the next 10 years, we were only able to sell it for $10,000 more than we paid originally. So, including the renovation costs, we lost money on that 10-year home ownership experience.
True, we were able to almost steal the house we live in now, and have had the benefit of the scenario 1 gains over the last 17 years, building up a substantial tax-free gain and increase in equity.
However, here’s where we segue into the other side of homeownership - maintenance, repairs and the dreaded updating and renovation bug. Here is just the last few years’ experience.
The foundation recently gave signs of slipping, so there are now 24 nice new piles hidden under the basement. Cha Ching. The driveway was in bad shape when we moved in, and there’s a limit to how many times you can pump mud under it to raise it. Replaced last year. Cha Ching.
Settling soil required re-landscaping. It turns also that out that toilets wear out, and paint needs to be refreshed. Cha Ching. Don’t ask me about the previous ten year project to replace virtually all the windows. Cha Ching.
Optional, so I won’t mention it, is renovating a room every two years. Price out a new kitchen some time. Optional Cha Ching.
Our roof is cedar shakes, which look beautiful, but are now at the end of their recommended life. Tough decision - keep the beautiful cedar look for the cost of a medium-sized car, or save money on asphalt shingles?
But, on the other hand, we have a place we call home. It’s permanent (as long as we choose), there are no landlords or rent increases to worry about, those renovations have truly made it ours, and we have something to sell, whenever we choose to downsize, travel or rent.
So, there are pros and cons, and clearly there are costs to home ownership. But what about the gains?
Well, my personal feeling is that housing is getting unaffordable in most urban centres. I don’t see how Canadians will be able to pay twice as much ten years from now, as they are paying now compared to ten years ago.
Also acting against such repeated rapid price increases are the actions of three levels of government. On October 14, I wrote about the tighter federal mortgage rules. BC has introduced a 15% tax on foreign home buyers, and Ontario is looking at measures to limit price increases. Here in Winnipeg, the City has introduced a fee on new development, which will increase the cost of a new home. Will that cause more people to stay in their current houses?
I think we have just scratched the surface of this debate. In our next column, we will look at some of the ways to build equity and wealth as a renter, and answer some of the angry comments I expect from realtors and developers (assuming they have any anger left after venting for weeks at City Council and the administration.) I look forward to hearing from you all.
In the meantime, if this is a topic of real interest to you, consider picking up the brand new book The Wealthy Renter by Alex Avery, a much smarter fellow than me.
* * *
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is a Certified Financial Planner and senior advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.